Things That Make You Go Hmmm...

Though they reunited this past month for a series of concerts at London’s O2 Arena, the cast of Monty Python last assembled onstage together at London’s Drury Lane Theatre a staggering 40 years ago.

As they took to the stage at the O2 in early July, the surviving members of perhaps the most famous comedy troupe in history (sadly, Graham Chapman died in 1989) boasted a combined age of 357.

As expected, neither of these facts deterred people from flocking to see the Pythons; nor, it has to be said, did the occasional “senior moment” on stage prevent rapturous critics from garlanding them with rave reviews.

The centrepiece of the show was, of course, the famous “Parrot Sketch” in which John Cleese returns a dead Norwegian Blue parrot to “the very boutique” from whence it came “not ’alf an hour ago.”

The sketch, written by Cleese and Chapman in 1969, took aim at the British fondness for euphemism (particularly as pertains to death) and (somewhat ironically, given the subject) became one of the most mimicked pieces of comedy ever conceived.

The YouTube video I linked to above (just in case there is still anybody out there who HASN’T seen the “Parrot Sketch”) has 4.5 million views alone.

However, buried in the Python’s canon of work lies another sketch which proved far less popular amongst the viewing public but which found favour amongst (of all groups) the scientific community.

The sketch, “Anne Elk’s Theory on Brontosauruses,” appeared in the 31st episode of Monty Python’s Flying Circus, which was entitled “The All-England Summarize Proust Competition”; and it featured Chapman as a television interviewer and Cleese (in drag) as Miss Anne Elk, a paleontologist, who was in the studio to discuss her new, ground-breaking theory on the afore-mentioned dinosaurs.

What followed when Elk was questioned about her theory is classic Python:

Presenter: You have a new theory about the brontosaurus.

Anne Elk:Can I just say here, Chris, for one moment, that I have a new theory about the brontosaurus?

Presenter:Uh... Exactly...

Very long pause

(prompting) What is it?

Anne Elk:Where?

Presenter:Your new theory

Anne Elk:Oh! What is my theory?

Presenter:Yes!

Anne Elk:What is my theory that it is? Well, Chris, you may well ask me what is my theory.

Presenter:I am asking.

Anne Elk:Good for you. My word yes. Well Chris, what is it, that it is, this theory of mine. Well, this is what it is. My theory, that I have, that is to say, which is mine... is mine.

Presenter:Yes, I know it’s yours! What is it?

Anne Elk:... Where? ... Oh! This is it.

Starts prolonged throat clearing

Anne Elk:(clears throat) This theory, which belongs to me, is as follows... (more throat clearing) This is how it goes... (clears throat) The next thing that I am going to say is my theory. (clears throat) Ready?

Inevitably, after such a prolonged build-up, the payoff is predictable in that Elk is clearly stalling in order to avoid explaining her theory for as long as possible; but, eventually, she is forced into laying it out for the whole world to see:

All brontosauruses are thin at one end; much, much thicker in the middle; and then thin again at the far end. That is my theory that is mine and belongs to me and I own it and what it is, too.

... and in that instant, she is exposed for what she is: a fraud.

The scientific community adopted Anne Elk’s theory on brontosauruses to describe any scientific observation which is not actually a theory but rather a minimal account; and that sobriquet — it seems to me — merits far broader application and acceptance.

Lately I seem to be constantly reminded of Anne Elk everywhere I turn, as the world descends into chaos and those charged with running it (at least officially) stumble from pillar to post, relying on the public’s buying into whatever they spin in order to press their agenda.

We see it in the rush to demonize Vladimir Putin for the MH17 tragedy, along with everything else that remotely touches Russia; we see it in the one-sided reporting of events in the Middle East; and we see it in the broad-brush strokes painted across the China canvas when assumptions are made about what is happening inside the political hierarchy that runs the Middle Kingdom.

However, the one place it is glaringly obvious (and has been for a number of years) is in the talk emitting from the mouths of the world’s central bank governors.

Now, I am no great fan of Putin; nor do I feel able to confidently choose sides between various factions in the Middle East — mainly because I find it impossible to take what I read in the mainstream media at face value and therefore come to what I would consider a well-informed opinion — but the beauty of central bankers is that they hold press conferences and release detailed minutes of their meetings which, if anything, throw perhaps too much light onto their deliberations, operations, and machinations for anybody’s good — least of all their own.

This theory, which belongs to me, is as follows... (more throat clearing) This is how it goes... (clears throat) The next thing that I am going to say is my theory. (clears throat) Ready?

We think the euro is irreversible. And it’s not an empty word now, because I preceded saying exactly what actions have been made, are being made, to make it irreversible.

But there is another message I want to tell you.

Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.

Now, unlike Anne Elk’s (brackets, “Miss,” close brackets), Draghi’s theory — though in effect every bit as toothless should his bluff ever have been called — was taken at face value by a gullible public; and disaster was averted (though, along with the gullibility, there was also an implicit explicit bribe put carefully in place — buy bonds of bankrupt countries, and we’ll make sure you don’t lose money).

Many of you will probably not remember what the edge of the abyss looked like, so here are a couple of reminders — just for old times’ sake:

The chart above shows the yields on 10-year government bonds for Greece’s $242 billion economy; Spain’s $1.35 trillion economy; and the behemoth, Italy’s $2.17 trillion economy through 2011, going into the unveiling of Draghi’s Elk Theory plan and beyond.

Due to scaling issues, the plot for Greece is on a separate scale on the right-hand side of the chart; but, if you look carefully, you’ll see that yields on its 10-year bonds peaked at 37% in early 2012 and, despite some serious jawboning on the part of EU politicians, were still at 28% in July when Draghi cleared his throat.

Remember those days? Europe was teetering on the edge of oblivion, and each day saw the chances of a disorderly unwind of the euro increase to the point where even some of the more staunch pro-Europe voices began to waver in their certainty about its future.

Writing somewhat presciently a few short weeks before Draghi unveiled his Elk Theory, plan, The Economistlaid out the bind perfectly:

(Economist): Even the single currency’s die-hard backers now acknowledge that it was put together badly and run worse.

Greece should never have been let in. France and Germany rode a coach and horses through the rules designed to prevent government borrowing getting out of hand. The high priests of euro-orthodoxy failed to grasp that, though Ireland and Spain kept to the euro’s fiscal rules, they were vulnerable to a property bust or that Portugal and Italy were trapped by slow growth and declining competitiveness.

A break-up, many argue, would allow individual countries to restore control over monetary policy. A cheaper currency would help match wages with workers’ productivity, for a while at least. Advocates of a break-up imagine an amicable split. Each government would decree that all domestic contracts—deposits and loans, prices and pay—should switch into a new currency. To prevent runs, banks, especially in weak economies, would shut over a weekend or limit withdrawals. To stop capital flight, governments would impose controls.

All good, except that the people who believe that countries would be better off without the euro gloss over the huge cost of getting there. Even if this break-up were somehow executed flawlessly, banks and firms across the continent would topple because their domestic and foreign assets and liabilities would no longer match. A cascade of defaults and lawsuits would follow. Governments that run deficits would be forced to cut spending brutally or print cash.

Has anything changed in Greece since July 26th, 2012? Well, let’s see:

Unemployment?

Nope.

GDP?

Well, technically, I guess you could say it rose, since it only fell 4% last year instead of 7% — it depends on how you define improvement, I guess. Either way, though the rate has slowed, the Greek economy spent its sixth straight year in contraction in 2013.

So no real improvement in Greece then.

What about Spain?

It’s a different chart from the Greek one, I promise you. It just LOOKS the same. In fact, the Spanish headline unemployment rate has actually plummeted to 25.4%, so... hooray for Europe!

Of course, the official GDP growth forecast for Greece for 2014 is... drumroll... +0.6%. And Spain? Well that would be growth, too — to the tune of +1.1% — but this is the work of the European Commission, a body whose website makes available the following upbeat reports for your downloading pleasure:

What does the more-broadly-growing/gradually-recovering/ground-gaining/headwind-overcoming EU economy look like in graphical form?

Funny you should ask. I just happen to have the chart right here, courtesy of Eurostat:

{cough}.

Look... as we’re doing this, we can’t leave out Italy — and, what with Renzi’s resounding victory for the pro-EU lobby and the demise of Silvio, things there must be on the up, right?

Wrong.

And when we move to unemployment, well, things just go from bad to worse. As you can see in the chart below, youth unemployment in Italy is still rising relentlessly (it currently stands at 43%), and headline unemployment is also steadily climbing, suggesting that Italy has yet to reach its “bang moment”:

A further reminder of just how perilous things were back in 2012 can be seen in the chart below, which shows the Eurostoxx European Banks Index through that crucial 2011/2012 period.

In the 12 months prior to Draghi’s soothing words, the index had halved in value. From the day Draghi spoke, the rot miraculously stopped and the banks began a climb that would see them appreciate in value by over 100%.

Did European banks become more sound institutions on July 27th, 2012? (That was a rhetorical question, people; put your hands down.)

The only really important happenings in Europe’s banking sector during the post Elk Theory speech period were the following:

Cyprus bail-in

Erste Bank made a tiny miscalculation in its bad loan provisions (which led to a small 25% fall in its share price).

Corporate Commercial Bank (the 4th largest bank in Bulgaria) was taken into protective custody by the Bulgarian Central Bank.

Banco Espirito Santo sort of kind of went a bit pear-shaped.

European banks loaded themselves to the gills with peripheral European debt as part of the quid pro quo with Draghi, but making free carry off the Elk Theory promise of a desperate central bank head is hardly what used to pass for banking.

Remember when banking used to be about things like making loans?

(Zerohedge): [The] ECB update on Monetary Developments in the Euro Area was as grim as always, with the all important series of loans to the private sector sliding once again by 2.0% Y/Y, worse even than April’s -1.8% contraction, driven by a €43 billion collapse in loans to households. This happened even as the now largely meaningless M3 rose by 1.0%, an increase to April’s 0.7% Y/Y change.

In other words, Europe is in bad a shape as pretty much ever, and loan creation is just fractions above its all-time low print of -2.3% from late 2013.

Never mind.

As long as Draghi’s Elk Theory promise is held up as good, there’s nothing to worry about.

When recently (finally) confronting the spectre of deflation, Draghi once again cleared his throat. Lo and behold, yet another Elk Theory tumbled forth. Grandstanding over a frankly ludicrous 10bp cut to an already ridiculous 25bp benchmark rate (as if it will make any difference), Draghi realised, no doubt, that it was time for yet more vague threats promises rhetoric. After imposing negative rates on European banks’ deposits, Mario Draghi (brackets “Mister,” close brackets) was put on the spot once more in the press conference:

This theory, which belongs to me, is as follows... (more throat clearing) This is how it goes... (clears throat) The next thing that I am going to say is my theory. (clears throat) Ready?

Are we finished? The answer is no. If required, we will act swiftly with further monetary policy easing. The Governing Council is unanimous in its commitment to using unconventional instruments within its mandate should it become necessary to further address risks of prolonged low inflation.

Now, let’s be serious for a moment, shall we?

Not only have the GIS (Greece, Italy & Spain) failed to recover, but the engine room of what’s left of Europe is also sputtering:

(Ambrose Evans-Pritchard): Europe’s economic recovery has stalled. The EMU policy elites took a fateful gamble that global growth alone would lift the eurozone off the reefs, without the need for serious monetary stimulus or a reflation package to ensure take-off velocity.

Their strategy has failed. The Bundesbank says German growth may have slumped to zero in the second quarter. French industrial output has fallen for three months in a row. French business surveys point to an outright contraction of GDP, with a high risk of a triple-dip recession.

Stagnation is automatically causing debt ratios to spiral upwards yet again across a large part of the currency bloc. The situation is doubly delicate since the European Central Bank is no longer able to serve as a lender of last resort for Italy, Portugal and Spain.

Germany’s top court has ruled that the ECB’s back-stop plan (OMT) “manifestly violates” the EU treaties, and is probably Ultra Vires. The political reality is that the OMT cannot be deployed, whatever the European Court says when it issues its own judgment long hence.

Any external economic shock at this stage risks exposing the fundamental incoherence of the EMU system, and therefore shattering the fragile truce in the markets.

Ambrose talks about the gamble taken by what he calls “EMU policy elites” but fails to mention the gamble taken by Draghi — that his Elk Theory would never be challenged.

So far, it hasn’t; but at some point Draghi’s going to have to stop clearing his throat and lay out some concrete steps — and THEN we’ll see just how effective he can be. My guess is that one of two things happen: the economies of Europe prove so weak that its politicians find a way around the “technicalities” of the Maastricht Treaty, which currently prevent them from printing money, and allow Draghi to unleash an inflationary blitz; or the market realizes that his words are hollow, and confidence in the ECB head (the only thing holding European markets together) is shattered.

That... would be ugly.

Already the pernicious effects of compounding are making their mark on the debt-to-GDP ratios of European governments, a point Ambrose makes quite clearly, using Italy as an example:

(Ambrose Evans-Pritchard ): Eurostat revealed this week that Italy’s debt rose to 135.6pc of GDP in the first quarter. This is near the point of no return for a country that borrows in what amounts to a foreign currency.

What is remarkable is that the ratio has jumped 5.4 percentage points over the past year despite austerity and even though Italy is running a primary budget surplus.

This is the toxic effect of near deflationary conditions on debt dynamics. Unless action is taken to boost nominal GDP, Italy must mathematically sink deeper into a compound interest trap.

Precisely, and it’s not just Italy that’s falling into this dreadful trap, as you can see from the chart below, which shows the YoY % change in debt-to-GDP ratios in Italy, Greece, France, and Spain:

There’s your austerity. Right there.

Greece didn’t waste any time getting back on the horse after their default restructuring wiped about 13% off their debt-to-GDP ratio in 2012, did they?

Make no mistake, folks, Europe is back — and not in the good way.

But it’s not just Draghi laying out Elk Theories.

Oh no.

Across the Atlantic, the continued narrative being spun by the Yellen Fed is one of “nothing to see here,” with a dab of “there’s no inflation,” a soupçon of “we will keep rates low for a very long time,” a dash of “everything bad that has happened can be put down to the weather,” and the merest suggestion of “these aren’t the droids you’re looking for.”

The Fed’s nemesis is inflation; and, over time, they (along with the BLS) have done everything in their power to paint a picture of benign inflation in order to further their agenda.

Take hedonics, for example.

For those of you unsure as to what hedonics (or “hedonic regression” to give it its full title) is, here’s the quick and boring dirty:

(Wikipedia): In economics, hedonic regression or hedonic demand theory is a revealed preference method of estimating demand or value. It decomposes the item being researched into its constituent characteristics, and obtains estimates of the contributory value of each characteristic. This requires that the composite good being valued can be reduced to its constituent parts and that the market values those constituent parts.

Bottom line?

If your new iPad has more features than your old one did, then even though the price went UP, the newer model is “technically” cheaper because of the extra memory/pixels/whatever. Look, it just is, OK?

In a NY Times article published in May, the miracle of hedonics was laid bare for the world to see, and the chart accompanying it (right) showed that the cost of a television set (thanks to hedonics) has somehow fallen 110% since 2005.

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